According to the proponents of mercantilism, yes. According to me, yes or no. Cash's position in the hierarchy of value resides in the eye of holder. You can be sure that position varies. The king today can be demoted to the pawn tomorrow. Proponents of trade mercantilism, and their enablers, the international trade accountants, would do well to heed my point.
An American pays fifty-thousand dollars for a Toyota-built Lexus RX350. Let's assume the Lexus is built in Japan and Toyota profits five-thousand dollars on the sale.
Toyota's export is recorded as credit in the balance of payments of Japan. In keeping with double-entry bookkeeping, the credit creates a corresponding debit in the capital account. The trade is a winner to the proponents of trade mercantilism. They gush when exports exceed imports. A positive balance of payments implies that the country earns more than it spends, they boast.
The accounting is meaningless because the references are meaningless.
Trade occurs between individuals, not countries. The exchange of a Lexus for dollars occurred between a corporation (composed of individuals) located in Japan and an individual located in the United States. The American exchanged dollars for a Lexus;Toyota accepted dollars for a Lexus. "Japan" earned nothing; the "United States" paid nothing. (At the risk of sounding as if I'm contemplating the number of angels on a pinhead, what is "Japan" and what is the "United States"?)
The numbers tell us Toyota profited. The buyer's willingness to buy tells us he profited. We know the buyer profited because he willingly entered the transaction (which I explain in my previous post).
The buyer can go on with life psychically profiting from his Lexus purchase. Toyota has more work to do. Toyota is a Japanese country. The yen is the currency used within Japan's borders. Toyota needs to realize utility with its dollars. After all, money is always a means, never an ends.
What are Toyota's options?
The auto giant could, in turn, buy, fifty-thousand dollars of goods or services produced in the United States. It could buy U.S.-based assets or investments. Toyota could exchange its dollars for yen on the FOREX market, which enables it to transfers its utility conundrum to another.
But does someone, somehow owe someone, somewhere? Does the United States owe Japan anything? Does the United States owe Toyota anything? Did Toyota and Japan win with the Lexus exchange?
Toyota received dollars. A dollar represents a claim to a proportional amount of value in the U.S. economy.That dollar enables its owner to claim one dollar's worth of goods or services in the U.S. economy. In that sense, the trade deficit needs to be repaid to Toyota, or whoever owns the dollars Toyota received from the exchange with its U.S. customer.
A claim, though, is not automatically obligation. If Toyota had bought a U.S. Treasury 10-year note, the federal governmental would owe Toyota (but not Japan) the principal amount of the note plus interest. Confusion is caused by calling “debt” -- that significant portion of the U.S. current-account deficit -- that does not obligate Americans to repay money to foreigners.
Toyota could wave its dollars at me like a advertisement noodleman flailing to and fro in a windstorm; I'm under no obligation to sell Toyota anything. The same would be true if Toyota were interested in investing in my business. We might reach a deal on either account, to be sure, but the deal is not the product of satisfying a "claim." Though unlikely, Toyota could find no U.S. business willing to exchange with it, in which case the dollars Toyota owns are all but worthless. Toyota cannot redeem there for anything; there is no claim.
What about the savings bugaboo? Should we infer net exporters are prudent savers and net importers are spendthrifts?
The belief that trade deficits necessarily reflect a lack of domestic savings pervades the thoughts of many economists, especially those of the social-conservative strain. (President Trump's lead economist, Peter Navarro, being most prominent.) The belief is also wrong.
Indeed, U.S. trade deficits reflect not a lack of savings but an abundance of investment opportunities. They reflect faith in the U.S. economy. The fact that foreigners invest their savings in the United States is hardly the corollary of a savings deficient among the citizenry on the home-front.
Suppose that Toyota sells $1 billion worth of Toyotas to U.S. citizens. Suppose Toyota buy the equivalent amount, $1 billion, worth of U.S. computer software. Toyota uses this software to increase efficiency at its Japan-based auto factories. No trade deficit appears in this scenario.
Now, let's muddy the waters. Suppose that Toyota uses the $1 billion of U.S.-produced software it bought to increase efficiency at its U.S.-based auto factories. Because the software remains within U.S. boundaries, a $1-billion U.S. trade deficit is recorded.
Where is the savings deficit? The U.S. savings rate (Aggregate tallying like this is meaningless. It tells us nothing about any individual characteristic.) is unchanged in both scenario, despite only one of these scenarios featuring a trade deficit.
Blaming all increases in the U.S. trade deficit on on American's profligacy -- or, for that matter, on unfair trade practices abroad or free-trade generally -- conceals the foreigners eagerly seek opportunities to invest in the United States. Our trade deficit is more of a badge of honor than a scarlet letter.